Basic Concepts Economics
Basic Concepts Economics
Basic Concepts Economics
Introduction
According to one school of thought, history has no relevance to the problems faced by managers today.
Some are also of the opinion that management theory is too abstract to be of any practical use.
However, both theory and history are indispensable tools for managing contemporary organizations.
Like most modern disciplines, contemporary management thought has its foundations in the history of
management and the many significant contributions of theorists and practitioners. A theory is a
conceptual framework of organizing knowledge that provides a blueprint for various courses of action.
Hence, an awareness and understanding of important historical developments and theories propounded
by early thinkers is important for today’s managers.
In this chapter, we first discusses at the early approaches to management. We then focuses on four well
established schools of management thought (i) the classical approach (ii) the behavioural approach (iii)
the qualitative approach and (iv) the modern approaches of management. Finally, some emerging
approaches in management thought are discussed.
The Industrial Revolution, which began in Europe in the mid-1970s, was the starting point for the
development of management concepts and theories. The rapid growth in the number of factories during
this period and the need to coordinate the efforts of large number of people in the production process
necessitated the development of management theories and principles. Many theorists and practitioners
in the mid and late 1800s (pre-classical period) contributed valuable ideas that laid the foundations for
subsequent broader inquires into the nature of management. Five principle contributors can be
identified in this early period of development of management thought: Robert Owen, Charles Babbage,
Andre Ure, Charles Dupin, and Henry Robinson Towne.
Management Approaches
Scientific Management
Scientific management became increasingly popular in the early 1900s. In the early 19th century,
scientific management was defined as “that kind of management which conducts a business or affairs by
standards established, by facts or truths gained through systematic observation, experiment, or
reasoning.”
Frederic Winslow Taylor took up Henry Towne’s challenge to develop principles of scientific
management. Taylor, considered “father of scientific management”, wrote ‘The Principles of Scientifc
Management’ in 1911. An engineer and inventor, Taylor first began to experiment with new managerial
concepts in 1978 while employed at the Midvale Steel Co. at Midvale, his rise from labourer to chief
engineer within 6 years gave him the opportunity to tackle a grave issue faced by the organization-the
soldiering problem. ‘Soldiering refers to the practice of employees deliberately working at a pace slower
than their capabilities. According to Taylor, workers indulge in soldiering for three main reasons namely
1. Workers feared that if they increased their productivity, other workers would lose their jobs
2. Faulty wage systems employed by the organization encouraged them to work at a slow pace
3. Outdated methods of working handed down from generation to generation led to a great deal
of wasted efforts.
Taylor felt that soldiering problem could be eliminated by developing a science of management.
Employees used to hold back production to its one-third level because they feared that their
employers would cut their piece rate as soon as there was a rise in production
Each motion of a job was to be times with the help of a stop watch and shorter and fewer
motions were to be developed.
This replaced the old rule-of-thumb-knowledge of the workman
Differential Payment
Taylor felt that the wage system was one of the major reasons for soldiering. To resolve this problem,
he advocated the use of a piece-rate incentive system. The aim of this system was to reward the worker
who produced the maximum output. Under this system, a worker who met the established standards of
performance would earn the basic wage rate set by management. If the worker’s output exceeded the
set target, his wages would increase proportionately. The piece-rate system, according to Taylor, would
motivate workers to produce more and thus help the organization perform better.
Incentive was linked with production
A worker received low piece rate it he produced the standard number of pieces and high rate if
he surpassed the standard.
Taylor thought that the attraction of high piece rate would motivate workers to increase
production
Division of Work
Division of work in management process produces more and better work
E.g. Division of work based on technical or managerial specialization.
Discipline
Obedience to authority
Adherence to rules
Respect for superiors
Dedication to job
Unity of Command
Each employee should receive orders or instructions from one superior only
Unity of Direction
Subordination of Individual Interest to General Interest
Remuneration
The remuneration paid to the personnel of the firm should be fair. It should be based on general
business conditions, cost of living, productivity of the concerned employees and the capacity of
the firm to pay.
Centralzation
If subordinates are given more role and importance in the management and organization of the
firm, it is decentralization. The management must decide the degree of centralization or
decentralization of authority on the basis of the nature of the circumstances, size of the
undertaking, the types of activities and the nature of organizational structure.
Scalar Chain
Scalar chain means the hierarchy of authority from the highest executive to the lowest one for
the purpose of communication. It states superior-subordinate relationship and the authority of
superiors in relation to subordinates at various levels. As per the principle, the order or
communications should pass through the proper channels of authority along the scalar chain.
But in case there is a need for swift action, the proper channels of authority must be short-
circuited by making direct contact –also known as gang plank with the concerned authority.
Order
This refers to both material and social order in organizations. Material order indicates that
everything is kept in the right place to facilitate the smooth coordination of work activities.
Similarly, social order implies that the right person is placed in the right job by proper selection
procedure.
Initiative
Employees should be encouraged to give suggestions and develop new and better work
practices.
Espirit de corps
This means ‘a sense of union’. Management must inculcate a team spirit in its employees.
Bureaucratic management, one of the schools of classical management, emphasizes the need for
organizations to function on a rational basis. Weber (1864-1920), a contemporary of Fayol, was one of
the major contributors to this school of thought. He observed that nepotism ( hiring of relatives
regardless of their competence) was prevalent in most organizations. Weber felt that nepotism was
grossly unjust and hindered the progress of individuals. He therefore, identified the characteristics of an
ideal bureaucracy to show how large organizations should be run. The term ‘bureaucracy’- derived from
the German buro-meaning office referred to organizations that operated on rational basis. According to
Weber, “ a bureaucracy is a highly structured, formalized, and impersonal organization.” In other words,
it is a formal organization structure with a set of rules and regulations.
The term ‘bureaucracy’ is sometimes used to denote red tapism and too many rules. However, the
bureaucratic characteristics of organizations outlined by Weber have certain advantages. They help
remove ambiguities and inefficiencies that characterize many organizations. In addition, they undermine
the culture of patronage that he saw in many organizations.
Neo-classical Approaches
These approaches are called neo-classical because they do not reject the classical concepts but
only try to refine and improve them.
o Illumination Experiments
o Relay Assembly Test Room
o Interviewing Programme
o Bank Writing Test Room
Limitations
Focus on human aspects and ignores other variables
Over simplification of organization as a big family
Over-emphasizes symbolic rewards and underplay the role of material rewards
Unrealistic picture about informal groups
Production oriented and not employee-oriented
Leisurely process of decision making
Unrealistic demand on the superior
Wrong assumption that satisfied employees are more productive workers.
Behavioral Approach
The behavioral approach recognizes the practical and situational constraints on human
rationality for making optimal decisions.
Encourages the process of self-direction and control instead of imposed control.
Consider organization as groups of individuals with certain goals
Organizational change and conflict is realistic
Quantitative Approach
Also called as management science approach
To provide quantitative tools and techniques for objectively rational decisions.
Systems Approach
A system is a set of interdependent parts
Central to the systems approach is the concept of “holism”
A system can be either open or closed
Every system has a boundary
Contingency Approach
Attempts to integrate the various schools of management thought
Results differ because situations differ